Hidden Profits Blog

I attended an APICS event last night and the presentation by Robert Fox focused on lean & Six Sigma and why we would want to implement them. Most of us associate ‘lean’ with manufacturing as the concepts which originated at Toyota were focused on the manufacturing process to reduce cost in manufacturing, reduce lead times and improve quality. 

These concepts also apply to non-manufacturing businesses and to the non-manufacturing processes in all business, which I have referred to as the Financial Supply Chain (see my blog posts How to Evaluate the Financial Supply Chain http://www.hiddenprofitsblog.com/how-to-evaluate-the-financial-supply-chain and The Financial Supply Chain http://www.hiddenprofitsblog.com/the-financial-supply-chain).

While in last night’s presentation the concepts were not new, the approach and the reasons were certainly very thought provoking.  Lean processes and going lean are almost always associated with reducing cost.  That of course is a very laudable goal.  Last night the focus was on the goal of increasing throughput or capacity.  Which of course once you reduce waste and time of the process you automatically increase throughput.  We normally do not look at that side of the coin.  In manufacturing, Mr. Fox talked about how increased capacity provided the opportunity to make and sell more products without increasing the costs of production.  We usually think of increasing a capacity with the need to add plant space and/or additional locations machinery and people.  However, if we have reduced waste, thus freeing up capacity we can in fact increase the quantity produced and sold without increasing cost.  This makes the additional products produced very profitable. 

The same is true when we look at non-manufacturing processes or the Financial Supply Chain.  Even though the focus for the last couple of years has been on the slowing economy, layoffs etc., the reality is that many companies are growing.  As companies grow they rarely are evaluating their processes to be efficient.  The workload grows with the company, often faster, and they simply keep hiring staff and increasing office space to manage the workload.  Often as part of this lead times increase.  So what does this look like in the financial supply chain?

The number of AP invoices increases and often the number of late payments increases.  So the AP department grows and everyone scrambles to find ways to make sure that invoices are paid on time. The assumption being that the more people in AP the more invoices can be processed in a timely manner.  This often results in chaos.

As the number of customers increases, the number of AR billings and cash receipts increases.  Often the time to get invoices out to customers increases.  AR personnel are busy with billing and applying payments and they don’t pay attention to collections.  So, often cash inflow slows down.  And of course the number of AR personnel increase to handle the billing and cash receipts.

Slowed billing and payments start to create an imbalance in cash flow so now there becomes an increased reliance on working capital lines of credit, which of course increases interest expense.

Month end close processes become more cumbersome and more accountants are hired in accounting to address all the needs of the close process and management’s increasing need for information. 

Of course you also have the ancillary costs of more office space, additional locations, increase personnel in HR and Payroll and increased management levels.

What would happen if at this point the company embarked upon implementing lean business processes to optimize the financial supply chain? We could increase capacity and throughput in the non-manufacturing processes! The business would be able to grow at the same pace or maybe even faster, without the explosive growth in personnel and cost.  Management would have better information for making decisions which could further enhance growth.  Customers would probably have less complaints which would also further enhance growth.

This has in fact been my experience with many clients.  In my most recent project, the client was planning to double in size, which would have made them almost a billion dollars in revenue with locations all over the US and Mexico. By designing lean processes for AR/Cash Application, Purchasing/AP, HR/Payroll, Budgeting, Capital Assets and Financial Close, they project they will be able to absorb that growth with the current staff levels.  An accomplishment most CFOs would consider impossible. 

If you would like an assessment of how your company could benefit from lean business processes contact us at 818-709-6583 or info@ljrconsultingservices.com

At some point you have probably heard the quote, ‘If you fail to plan you are planning to fail’.  And with that individuals create goals and plans for their careers, life, vacations and companies create corporate strategies, annual plans and budgets etc.

However, how often does a company create a strategy for Information Technology.  I’m not talking about an IT budget although there are plenty of companies that don’t even have those.  An IT budget just defines how much of the corporate funds that IT department is allowed to spend and on what products/services.  What I am referring to is a strategy on how the company will utilize information technology to create competitive advantage, to open new markets, to brand the company and to support the operations of the business.

What do I mean by an IT Strategy or IT Roadmap?

An IT strategy or IT Roadmap is a detail plan that defines how and where information technology will be utilized in the company.  It identifies areas where management believes IT can be used to:

• Improve productivity and reduce cost
• Create a competitive advantage
• Improve intra-company communication and cooperation
• Improve financial controls
• Increase market share and open new markets
• Provide new opportunities for customers, partners and vendors to interact with the company 

It defines the priorities of the opportunities/initiatives, assigns responsibility/ownership and defines date and timeframe for each initiative. 

Like most plans it should encompass both short term and long term goals.  So it should include a vision of what the company would look like with all the desired functionality implemented over a 5 year time frame.  Then each initiative should be prioritized and placed on a 5 year, 3 year or 1 year schedule.  Finally a detailed 18 month plan should be defined that includes initiatives, projects, timelines and estimate cost and resources.

Why do I need to have an IT strategy or IT roadmap?

IT is no longer just about how to document the business transactions so it can be accurately reported to the IRS, the bank and other outside entities that need a picture of the financial status of the company. 

IT impacts every part of the business.  As a result there are many competing priorities from all areas of the company.  At one time accounting was the primary consumer of IT services, however, today IT touches everyone in the company, customers, vendors and partners.  So needs must be assessed, solutions identified, costs estimated and priorities set for all those competing interests.  In addition a path needs to be defined on how to get from where you are to where the company wants to be.  One of Dr. Stephen Covey’s 7 Habits is ‘First Things First’.  This is critical to define in an IT strategy.  Every IT initiative requires infrastructure, systems, and resources.  If those are not addressed in the correct or most logical order, the result is a failed and/or significantly over budget project.  A good IT strategy will define prerequisites and enable you to put the initiatives in the correct order for success.

To get more information regarding creating an IT Strategy, contact Lynda at 818-709-6583 or email info@ljrconsultingservices.com